In an update of its medium-term economic and fiscal projections for the United States, Fitch Ratings says that the implementation of automatic spending cuts and a government shutdown would not prompt a sovereign downgrade, but that further delays in setting a deficit reduction plan may.
Fitch says that the suspension of the debt limit until May 19 has reduced the near-term pressure on the U.S. rating, but a failure to raise the debt ceiling “in a timely fashion” would prompt a review, and likely a downgrade of the U.S. sovereign rating.
The key driver of Fitch’s sovereign ratings for the U.S. is the future path of government deficits and debt, it explains. And, in its base-case economic scenario, and assuming unchanged fiscal policies, it projects that federal debt will stabilize in 2014-2015 before resuming its upward trend in the latter half of the decade to beyond 80% of GDP. Including the debt of states and local governments, general government gross debt is projected to reach 110% of GDP; which Fitch says is a level that’s not consistent with the U.S. retaining its AAA status.
Stabilizing government debt below these levels by 2014-2015 is “a necessary but not sufficient condition” for securing the AAA rating, it adds.
Fitch estimates that US$1.6 trillion of deficit reduction measures, along with US$1.2 trillion of automatic spending cuts would be sufficient to stabilize federal debt at about 76% of GDP and general government debt at 106% in its base-case economic scenario. Placing the debt to GDP ratio on a firm downward path would require almost US$3 trillion of additional deficit reduction over the next decade, it notes.
During the course of this year Fitch expects to resolve the negative outlook placed on the sovereign ratings of the U.S. in late 2011. And, it says “further delay in reaching agreement on a credible medium-term deficit reduction plan would imply public debt reaching levels inconsistent with the U.S. retaining its ‘AAA’ status despite its exceptional credit strengths.”